World markets are plunging in response to fears and expectations that the United States will be (or already is) in a recession that will be both long and deep.
Headlines around the globe are rather stark:
Major Indexes Drop Sharply On Worries Over U.S. Economy (WSJ)
Europe Starts to Feel Pinch as U.S. Slowdown Spreads (Bloomberg)
Global markets plunge on U.S. recession fears (CNN/Money)
US recession fears sink global markets (AP)
So much for that decoupling thesis.
What is rather incredible about the past few years are the number of pinheads who so totally got this wrong. Not your run of the mill idiots who insisted Housing and Credit would have no broader impact; These hacks were merely blind incompetent cheerleaders.
No, what really stunned me is the number of otherwise intelligent people who, once again, claimed "its different this time."
Its one thing to be wrong, but its another thing to have your entire philosophical world view invalidated. That included the primacy of seeing what is going in the real world, of understanding what the official government data really means, of not ignoring broad and deep concerns amongst the population.
Its one thing to guess a specific data point wrong — does anyone reliable forecast NFP? However, its a horse of an entirely different color to stay wedded to a completely invalidated heuristics, or ignore economic truths with a validated and long history.
Consider these statements which we heard over the past few years:
The Yield Curve no longer matters
Earnings at an unusually high % of GDP are sustainable
The Business Cycle has been defeated
Ignore sentiment readings, the population is just upset about Iraq
Real Income gains are irrelevant
Mean reversion no longer applies
Supply side tax cuts pay for themselves
Dow Theory is a quaint antiquity
The (so-called) Fed Model "proves" equities are significantly undervalued
Despite commodity prices, there is no Inflation.
I’m sure there are more, but I’m only on my first cup of coffee.
~~~
QUESTION: What other economic statements, investing beliefs or market philosophies have been shown to be wildly false? What investing beliefs are now revealed as horrifically and expensively wrong?
I do not mean specific calls (but this, sell that), but rather, the larger rules and strategies that are now being revealed as utterly incorrect?
What say ye?
I guess this puts the nail in the coffin to the “stay fully invested in China until the Olympics” theory
Housing goes up forever
Borrow short, lend long
Record high margins are here to stay
Subprime is contained
How do we know what isn’t so. You introduced this concept to me and I read the book.
People who make decisions on how THEY have lived. Every great site I visit (less than 6)are today grinding what is happening across the world this morning. They(world markets)are reacting to how they will be affected by what they perceive our economics effects their society. If we focus on basing at 12000 and a market that should be adjusting between 12800 and 12000 – we should fairly OK tomorrow. However, tomorrow will be “play day” for the traders – should be interesting. Personally, except for very long-term holdings – I am in Cash at the end of every day – Cash has been King since the first of the year. When you are responsible for more than “yours” I guess Hedging all day Tuesday might be the Menu. Just a holiday thought Martin Luther King was a great man!
Tangential question: When will China achieve a critical mass of consumers? I have long expressed concern over China’s control over so much American debt, but everyone around me has said, “They can’t afford to wage economic war on the US. They depend on American consumption too much.” I just wonder when that might cease to be the case . . .
“It’s contained”
It’s the greatest story never told. – LK
President Bush is an adherent of free market principles.
1st major sticky thing that came to my mind was balance’g the desire to buy and help the economy out vs. not buy and keep my inside of home/office/studio economy balanced
it comes down to my community; county; state; country; global corporate worlds; … have to help me balance a subsistance lifestyle without borrowing
without the previous paragraph, consessions are required that affects the 1st paragraph … the 1st being I have combined home & office to exist above water
is that an answer to the deep question?
“stay fully invested in China until the Olympics”
Good one. From the start that was a bunch of nonsense.
That there is a so-called “plunge protection team.” Why aren’t readers on here calling it the “plunge team” now?? Cause it’s all conspiracy!
My overall belief is that long term relationships mean something. Reversion to mean is key. The mean says we are at the bottom of the long term historical range for the S&P. Outliers are certainly possible, but I go with history for long term profits.
Japan is a permanent outlier and should be ignored, good or bad.
World markets, particularly emerging markets, have picked up considerably over the last several years. Huge capital inflows and a rising standard of living means that their markets have to be evaluated on more recent history. Also, they are more prone boom / bust bubbles.
The housing bubble / yen carry trade bubble has just burst. The bottom did not fall out of the world economy, although the bubble bursts all over may give it that appearance.
A historical look at foreign charts show dips and rises of similar magnitude in sympathy with US markets. They will rise when US markets get their footing again. Emerging markets will rise and fall at greater proportions to US markets until they mature. This is how to make money if you buy at the bottom and never at the top.
The yield curve is distorted because of all the foreign money bidding down the rates on of US bonds. One might argue that the lowered yields are an inflation relief valve. If all that cash were being used for Consumption, then prices would rise dozens of percent.
Ignore sentiment … maybe. Watch what people do, not what they say. Everybody lies.
Supply side tax cuts pay for themselves … Only in theory. Tax cuts targeted for Investment never seem to happen. People who use the term Supply Side don’t really know what it means. They think all tax cuts are supply side.
On the other hand, broken clock economics can be defined as economics that is occasionally right. If you stick to the same story long enough, the business cycle will make it look like it came true. All broken clocks are right at least once a say. Markets don’t go to zero, unless it is different this time.
Money needs a place to go and stability invites risk. The markets will recover and go up again sooner than the majority currently believes.
Regarding inflation, the world is facing something new. The demand for a lot of commodities is outstripping supply and supply will not satisfy demand in a lot of cases. This means the price mechanism must ration supply. Inflation is still a result of too much money chasing too few goods. Deflation is not the cure for supply problems.
Are equities undervalued? Who knows? I’m a believer in the greater fools’ theory. For all I know, skyhooks maintain the price levels of equities.
“DEFICITS DON’T MATTER” – Dick Cheney
Excerpt from Paul O’Neill ( ex-Treasury Sec)’s book:
So at a meeting with the vice president after the mid-term elections in 2002, Suskind writes that O’Neill argued against a second round of tax cuts.
“Cheney, at this moment, shows his hand,” says Suskind. “He says, ‘You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due.’ … O’Neill is speechless.”
http://www.cbsnews.com/stories/2004/01/09/60minutes/main592330.shtml
-K
“A smart computer programme can eliminate risk.
sharpest inequalities in wealth and income since the 1920s are actually a good thing
ps – reading the local paper I see Hilton is sending a local call center into a home based network
this probably (dont know) sets up IRS-1099 Contractors with high speed internet and other utility writeoffs provided by this mini business model
add saving on daycare, gas and time over roadway and thats a solution with overtones
John Hussman had an essay on his site a few months back debunking The Fed Model
Hussman on Fed Model
I blame the Fed for 70% or everything. Their major problems were:
1. Creating the moral hazard that allowed rampant speculation and the two bubbles.
2. Believing their own lies (birth/death model, inflation ex food and energy)
3. Not overseeing the banking system properly, which indirectly allowed wall street to also run amok with derivatives.
Another 15% of the blame goes to the media, particularly Bubblevision and its main characters (Jimbo, Goldilocks Larry, Barudjian…). The other 15% goes to Bush and his policies. He’s only been around 7 years and this bubble is over 20 years in the making.
There is an amazing parallel with the war in Iraq. So many pundits were so wrong about everything going into the invasion. And yet they are still given a platform and treated as if their opinion was valid (Bill Kristol now at the Times.)
None of these Eco-pundits will go away or taken to task over their past bullshit statements.
“Buy as much house as you can afford.”
Nothing to add here….other than…where the hell is John Devaney (owner, or is it former owner, of the yacht “Positive Carry”)these days?!?!?!?!
Has he committed suicide yet?
Is he completely broke yet?
Has his wife left him yet?
Or, is he curled up in a ball smelling of cheap burbone mubbling to himself in the corner of an empty room in his 35,000 Biscayne Bay foreclosure…..”I had it all, it all seemed sooooo easy, I really do understand the debt markets, or do I?…..”
I’d like to see the European Bank start to lower rates and watch the Fed go down 1% next week. They’re going to end up there anyway. Why dribble it out by a piss squirt at a time.
Big problems will happen eventually if the Fed only mills about, as it has historically.
Wages become savings. A lot of that savings is placed into assets that fluctuate in price due to market conditions. Even big fluctuations like the one now is ok providing market regulators respond with something to offset the decline. Right now, we are on a metaphorical roller coaster ride and on the scary part. Few are really panicked, although the noise level may make it appear otherwise.
Now … assume stupidity. The Fed doesn’t act. Asset prices fail to rise, and possibly fall more. Wealth declines and purchasing slows. This will create a deflationary spiral caused by wealth destruction. This was Japan in the 1980s. They have not completely recovered from it, either.
Bernanke is facing the Greenspan dilemma. Lower rates are ok, but leaving them there forever is insane.
If the Fed does not lower rates significantly next week and if Europe does not follow in kind, then new history will be written. S&P trend lines won’t matter for a long time coming.
A stable Fed will bring a stable market.
All of my opinion to this point has been based on a rational Fed model. So far, Bernanke hase done everything ok. Now it is time to bring out the elephant gun.
‘A rate cut will fix everything’ is my fav. It’s like trying to reduce drug-related crime by increasing the amount of drugs available.
I love Hussman’s piece…just re-read it. The avg. forward P/E given current record margins for the market is 8. The scary implication? Even if earnings estimates are correct for the coming year (almost ludicrous to assume unless you are Abby Joseph Cohen), the S&P using historical pre-bubble data should be cut in about half.
As John says about the Fed Model “Warning…statistical artifact”
What other economic statements, investing beliefs or market philosophies have been shown to be wildly false?
that BR is a permabear.
Heard on CNBC many times: tech is immune to a downturn.
This will be proven so false as to emit crazy laughter.
Disclosure: Long QID
“Risk has been tamed.”
That as of July 6, 2007, we no longer needed the uptick rule.
To be fair, Japan’s deflationary spiral and wealth destruction started from a point of massive asset inflation. It is said that, at that time, the real estate value of the royal compound of the Emperor was worth as much as all the real estate in the entire state of California.
We aren’t even at a fraction of that level. But Japan is a great laboratory for what happens to the economy when wealth destruction occurs at a chain reaction level.
“Tuesday, Jan 22nd, 2008, the DOW will not crash”. Toronto down over 500 points…on heels of plunges in Europe and Asia.
Unless intervention overnight, expect futures down 500 pts+
This is wild…dollar soaring vs. Euro, tanking vs. Yen. The euro must be utterly crushed vs. Yen.
The ECB’s whistling by the graveyard as European banks go down the drain is the esiest short call there has been in the last 20 years …. stay short DB , CL , UBS , CS , RBS , BNP ,AZ
EUR/JPY carry is being unwound at a furious rate …. first it was AUD/JPY , now EUR
Barry…Here’s the Cartoon of the Day:
Gravity Lessons
Did anybody mention “deficits don’t matter”?
Steve Barry,
If Hussman is so smart, then how come his fund yields were so crappy over the past few years? It look like broken clock economics to me.
The three that irk me are:
Supply side economics still works (what cinefoz said too)
The markets are more flexible now – whatever that was supposed to mean theoretically, actually meant we can hurt our back even more when we strain it doing stupid things we’ve never done before
Deficit doesn’t matter (also included in there is “Crowding out doesn’t happen anymore”)
The emerging markets are the safe haven.
Trickle down economics
Lower dollar will make us richer through exports
Growth will beat value
It’s going to be a stock picker”s market this year.
The bottom’s in on C, XLF etc….
You may disagree with Bush but you’ve got to give him credit for the economy
Perhaps someone has already said this one:
“don’t fight the FED”
I guess that this implies “don’t be short when the fed is loosening.
Cinefoz:
Are you relatively new to investing? Hussman saw the bubble forming and hedged his portfolio. While others were making great returns during the housing bubble and the private equity boom, he lagged in comparison. In the Internet bubble Warren Buffett was seen as a dinosaur for lagging. Who will be laughing now? Hussman’s rigorous analysis is some of the best I have seen for free on the net.
Look on the bright side. The Europe and Asian markets have one night to recover.
If world indices are any guide, Dow down 500 tomorrow absent panic rate cut.
Moin from Germany,
here the song of the day….
Monty Python – Always Look on the Bright Side of Life
If it turns out I was wrong and the markets don’t become profitable for those who buy at a bottom, my accounts will suffer.
If it turns out I am right and make a lot this year, I promise to do an obnoxious happy dance and shake my butt in the most smart ass way I can at all the negative types here. The year is just starting. Last year I did the same thing I am doing now and I did GREAT!
Ditto Steve Barry.
Hussman did quite well 2000 2004. He says his portfolio is hedged neutral. He will no doubt grossly out perform over the next 3 years or so.
one true one right now: CASH is KING.
one false one that I am afraid many still believe:
The Fed can save us and is not pushing on an overleveraged string…
Wow tomorrow should be UGLY.
I notice there is still massive speculation that stocks will ride right back up and fast.
The problem is not housing, the economy or debt alone. The main problem is speculation and the fact that people borrowed money to speculate in just about everything:
Housing
Global Growth
Metals
etc etc.
When AMTD and ETFC show very low margin loan amounts is probably the right time to start getting back into the market long.
appropriate for these days… LOL
http://www.youtube.com/watch?v=jHPOzQzk9Qo
Isn’t it premature to lay to rest the decoupling theory? Isn’t there a saying about how the stock market predicted the past 8 recessions when they were only 5? Just because a large number of investors in the rest of the world got twitchy doesn’t necessarily mean that the world economy ex USA has deteriorated significantly.
Steve Barry,
I saw the bubble coming too, but I still made money by working with it.
If econometrics is accurate, why aren’t all econometricians rich? And why didn’t he do better that around 4 1/2% for many years when I did more than that on my worst year?
They didn’t get it wrong. There is an economic decoupling, but not a financial decoupling. That is what the smart people claimed all along. Asia will not sink into recession as we do, their growth may be knocked down 2-3 points perhaps but that still leaves then growing at 8%.
Just because financial markets go down together does not mean the economies are all tanking.
That the Russell 2000 is no longer a leading indicator. It started melting down earlier and was a convincing tell for those listening/watching.
Cinefoz:
You saw the bubble coming…know its popped…and are now long??? Maybe you are smarter than Hussman. I’ll defer judgement on you till year-end. Good luck.
“Markets don’t go to zero, unless it is different this time.”
???
Many did. Go. To ZERO. It is the ones that haven’t yet that are exceptional.
The best markets of the early 20-th century: Russia, Argentina, Germany, Cairo – all gone.
The deficit isn’t that big.
Steve Barry,
It’s always possible that this time is different and that this drop will be one we never recover from. But I doubt it.
Right now, it is up to the Fed and whether they lower interest rates at the same rate that old men piss at. Or whether they do it right and go big and get it done. Ditto Europe.
If the Fed fouls it up, expect to see the malaise for a long while. Wealth destruction will not support spending. (I’ll just have to buy more later than I originally planned. I’m pretty resilient and am planning for both a good Fed and a bad Fed.)
How’s about sometime in mid October when an analyst says “We’ve just cleared overhead resistance in the SP500 with new all time highs. It’s now safe to buy and hold for the long term!” Similar, I guess to the downgrade of Citigroup after the 50% whackage. My goodness…the jokers get funnier all the time.
• That regulations put into place in the aftermath of 1929 to control stock market and financial sector excesses were no longer needed.
• The negative domestic U.S. impacts of the globalization of the labor markets do not matter.
• Location, location, location is the only thing that matters in real estate.
and I’ll add one that hasn’t been proven wrong… yet:
• A 1929-style crash and burn is absolutely not possible in any way.
“What other economic statements, investing beliefs or market philosophies have been shown to be wildly false?”
The Oscar-winning one in my book is:
“Markets can police themselves”
Buy the whole market of stocks, mortgages or whatever else, and you can have predictable and sustained returns.
This one I’m afraid will take longer to debunk, and there are people still probably willing to argue over it.
How bout-
we need to get peoples money in private accounts for Social Security
They don’t make enough Suburbans to protect Bush’s motorcade during a 1,000 pt drop in the Dow if the private account plan had been enacted.
Toronto now down 550 pts. Unless announcement overnight… DOW is toast tomorrow morning.
I like this one
Last year I did the same thing I am doing now and I did GREAT!
People will now rush to protect retirement money. Think of all the baby boomers.
This should be the worst crash ever.
No matter what the Fed does people will run to protect their money.
Don’t fight the Fed.
Bwa ha ha ha ha. The Fed isn’t even trying to fight. It set high expectations with talk and is now hiding in the Ivory Tower.
ignoring the fundamental and technical events that many of us have used to be successful in the past. Those did not matter in the last half of ’06 and ALL of ’07 while we were consistently told that those indicators (that we’re telling us it was coming to an end) somehow did not matter to “this” market for many of the same reasons you originally list.
Ciao
MS
Do not confuse the whole of the economy with the stock market.
European companies are being sold off today regardless of good p/e, p/b and several other valuations measures.
Most of them have foretold a healthy next two quarters.
They may be right, or they may be wrong.
Time will tell.
But to think that crashing of the markets is a proof of economies re-coupling is just bias.
Or you have a very good crystal ball indeed.
My vote goes to Kenneth Fisher who proclaimed again and again on Bloomberg against Jim Rogers and Marc Faber that NONE of this credit stuff mattered (hand gestures galore) that subprime was a non-event and yadda yadda.
In his year end column in Forbes, he blamed it all on the yen (not his poor foresight) and ate less crow than he deserved. I think he has more coming.
Amen, brother.
That’s why I always read your blog.
You saw the Emperor’s nekked butt.
Look, i wouldn’t sweat this thing today. the fed with dudely doo little at the helm is probably meeting now with the representatives of the PPT and tomorrow morning after a capitulation selloff at the opening the markets will turn around mid day and rocket. all weekend long the pundits were mouthing to stay the course, ride it out, it always comes back, the biggest gains typically come a specific day and if you are out of the market, you lose. you must stay fully invested all the time. I m sure my google will get crushed in the morning.
I think before the DOW opens tomorrow a tremendous story will build about how “overdone” this is. I don’t doubt it will drop, but I bet it doesn’t fall 6% at the open.
“Oversold” is like a Pavlovian bell to the “Greater Fool.”
“Real estate always goes up” and “buy now or be priced out forever”. My stock broker would be indicted if he went around telling this to his clients. RE agents aren’t held to any standard of truth.
Here’s one you’ll see broken this year:
“The Euro is the worlds new reserve currency”
In corrections past in the US stock market, the strongest stocks held up until the end. The correction/selloff needed the strongest to succumb to the selling. That appears to be what has happened now on a global scale. The strongest markets, Chinese and Indian, have finally cracked and cracked big. Wondering if this is what was necessary to get everyone on the same plane, worrying about a recession.
I have to say it took a remarkably short time for the investors of the world to learn about Credit Default Swaps. Until last year, even when all the three and four letter subprime/mortgage related acronyms were making the rounds, you didn’t hear any talk about the other derivatives. In 2008 talk of those derivatives has invaded several financial pages and blogs. It hasn’t yet made the local newspaper yet (at least I haven’t noticed yet), but I am inclined to think that we no longer have a pollyanna world — the problems are coming to the fore and being acknowledged and priced in. When will that be over? Let’s wait and see.
What the Fed statement should read next week (after being polished up and made to appear scholarly)..
The Open Market Committee of the Federal Reserve Board has lowered rates 100 basis points and the discount rate 100 basis points, effective immediately. Rates in the future will be monitored and adjusted up or down as required.
While inflation is always a threat, the lack of economic growth, the likelihood that economic growth has stalled, and the significant lag time between the setting of policy and the time it takes for rate cuts to take effect in the economy has caused the Board to act quickly and decisively.
While the Board will remain vigilant against inflation, further rate reductions may be required. Lowered rates are necessary to jump start the economy. The Board will announce after a future meeting when it believes rates have been lowered sufficiently.
This low point, after it is reached, will only be temporary, and will last for only as long as it takes for the economy to respond. Afterwards, rates will be gradually raised to a point somewhere between the lowest point and today’s levels.
“Deficits Don’t Matter” – Cheney
bernanke better cut 75 basis points at 9 am tomorrow..or it’s going to be very ugly …very ugly
Bernanke will cut 75 to 100 bps tomorrow, I’m going long at the open ladies and gentlemen. Anyone else going long at the open tomorrow?
Your nuts to go long on the open. Explain to me how the average Joe cares about the Fed cutting? He doesn’t. He cares about the retirement money he needs in 5-10 years.
Most people on 401K’s I bet have already clicked the sell button for tomorrow.
Suge, I will believe that when I see that. Bernanke is playing with the markets with happy talk and inconsistent action. He should be acting aggressively before market open tomorrow. However, SHOULD is not the same as WILL.
It is so sad that we have now become a centrally controlled market/economy. Lenin is smiling in his grave…
maybe long on valium….
12th percentile pondered:
Last year I did the same thing I am doing now and I did GREAT!
reply: It’s called ‘buying the dips’, retard. It’s also called ‘making money’. Perhaps this is too complicated for someone in the 12th percentile.
Ben didn’t cut on Friday…why would he do so before tomorrow’s bell?
Besides, I have a feeling that even if he did, it would be too little too late at this point.
I wonder if the circuit breakers will work tomorrow….
even though i wont make any money (i have puts hence i wont lose capital) i am still very excited and waiting for the market to open tomorrow..
i always used to beleive that share holders are fools, who give their money for no rights and not much yield….and they outbid each other to buy that stuff for more money every day…
Hey you guys missed “Dow Jones 40,000”
Now all this news about the PPT, lol. Another savior for the markets right?
The PPT was made in 1987 after the crash. So tell me how the PPT saved us from 2000 and 2002?
Anyone with a active 401K will look back on this and smile. Their payroll deposits are dollar cost averaging. The recovery will make them do a happy dance when they get their end of year statements.
I think one of the largest issues is the underlying idea that negativity in any major industry/sector can be contained. Given that everything is interconnected, no matter how vast and complicated the web, it follows that major variables that are highly dependent on each other can not possibly remain independent when both positive and negative events occur. Thus, when a bubble inflates in an industry as critical as housing, when it busts it will hurt the entire economy. Or, my new favorite, when the world’s largest consumer base ebbs consumption, the global economy will be negatively affected.
To suspend the laws of cause and effect in bad times yet stress them in good times is an unbelievable and unscientific folly.
Emergency Fed rate cut might prop market up a bit…but how does it stop a margin call? Margin debt may be sub-prime too.
Cinefoz,
I feel you are going to get hurt by this market. You should very carefully consider what everyone is saying here.
The baby boomers are not going to be happy if 20% comes off the 401k because they have no way to make this back as they need this money soon. This and margin calls are what is likely to take us down significantly.
“It’s called ‘buying the dips'”
They’re not always just dips.
“retard.”
“Speak sense to a fool and he calls you foolish” – Euripedes
What would be really scary is the FED cuts 75 or 100 and the markets do NOT respond.
Signs of desparation all around us.
Pass the meds!
They ain’t making any more land…
Apparently they ain’t making any more option ARMS and neg-ams either.
International markets are uncorrelated. That is until they are correlated. As more and more pension funds started to emulate Yale’s and Harvard’s over the past four years, markets became more and more correlated. The funny thing is that nobody said anything when all the markets went up at the same time.
Barry,
It is a shame that the tone of your writing changed so abruptly as markets have fallen and your prediction for 2007 had the good fortune of being accurate (2006 not so much). Over the past months you gained a lot of respect for calling it as you saw it with facts, regardless of whether the market mirrored, or not, those facts. Recently though, you have become somewhat arrogant in your writing and those facts have been replaced with “I told you so” and “such and such was wrong, I was right” posts.
The rallies of 2007 were mostly speculative delusions as you correctly pointed out, but the past 3 months are certainly overdone and also due to speculation, yet now we no longer see disguised references to bailouts or PPT conspiracies that prevent the market from falling. So I think a little more humility and the recognition that speculation drove prices up (not government manipulation), and that the same speculation is now driving them below levels supported by the facts, would only enhance your credibility.
“Go shopping.” President Bush, Jeb Bush, Rudy Giuliani.
John Borchers & Max,
Listen Carefully ….. BOOOOOOOO!!!
HAA HAAA HAAA HAAA! Goofballs. Careful, that’s not really your shadow. It’s a monster from the Cloverfields. You’re going to be digested alive, then die. Everybody else will be ok.
’cause baby it aint over till its over
lenny kravitz
Richard, if you don’t like what Barry writes then go to the street.com. Get a life.
False economic assumptions? The bulls kept arguing that housing is just 9% of the U.S. economy, subprime mortgages constitute just 5% of all mortgages outstanding, and only a few percent of all subprime mortgages are in default. Therefore, one need not be concerned about the housing market. Besides (according to the bulls), India and China will keep our economy humming along.
Here’s circuit breaker detail.
http://www.nyse.com/press/circuit_breakers.html
Economic depression is peaking nicely on Google now too.
http://www.google.com/trends?q=economic+depression&ctab=0&geo=all&date=all&sort=0
I think Cinefoz may be Jim Cramer.
it is all about stock options, if we did not have them subprime, nasdaq 2000 bubble, writedowns would not have happened.
Well, what does Bernanke have to lose at this point? Might as well cut tomorrow, cut by 100bps (strong message, decisive action), announce at 30 minutes after the open, generate a massive short covering, create a bottom and start ‘manipulating’ economic data to not make it look as bad as it really is. Can’t get too greedy, tomorrow is the day to go long. Comments?
i forgot to add i am buying today, believing this is a short term bottom.
Eren, I think you’re right. There will probably be a rally, then a nice summer sell off for reasons related to today, but creatively new in some way. This will make a good buy – sell cycle.
I’m really optimistic about the run up after that. It could last a year. That will have to be traded differently, it it happens.
I laugh out loud when I read people like cinefoz and RichardN who write that the current sell-off has the market “below levels supported by the facts.” That is hilarious. It is factually incorrect that the market is below historical averages. Read The Intelligent Investor by Ben Graham. We’re nowhere close to undervalued by any historical metrics. Market could sell off another 20% and only then be crossing the threshold between fairly valued and undervalued.
Circuit breaker. The MLK day is our circuit breaker. Asian and European markets have already panicked and the futures show panic. If this doesn’t move the Fed to act before tomorrow am, investors will have a hard time trusting the Fed in the future. We are now a huge, interconnected global stock market/economy. Unless you are bartering goods the way they did a thousand years ago, you are relying on the Fed and the market mechanisms to provide you some sense of security/guarantee/liquidity. The Fed can’t afford to lose that psychological underpinning.
There is nothing to worry about. Remember Hank Paulson told us that Subprime is contained, so everything must be OK!
Ben already knows the interest rate change can’t save the market and the bankers and brokers know it too.
This is why he was pumping the stimulous package.
I doubt anything happens to the interest rate tomorrow. Even if it does it’s effect will not last long to calm the markets.
I think they will lower by 25 or 50 on the meeting and each meeting lower by 25 or 50. This will allow calming over a much longer period of time. The kind of calming that is necessary as we go through economic depression.
Ben’s studied it and knows it. He knows where we are headed.
Suge knight..
I was not cheerleading the market, I was replying to the question of..”What investing beliefs are now revealed as horrifically and expensively wrong?” So to explain it to you I was saying..IT IS OVER!! BTW if you are going long the open tomorrow..eh never mind,thats what makes a market.
Tomorrow will be a bottom (short term?). It will be a classic open, really low, Dow down 300 points in less than 5 minutes, then it will close green after Bernanke announces a 75 to 100 bps cut. Can’t be too greedy even on the short/bear side. Take the open as a GIFT.
and of course he would never tell us because by telling the market you would make it true that moment.
Study his last speech. Where he said equity prices are likely to put pressure on the consumer. This tells you he thinks housing and stock prices go down in deflation.
Buy now or be priced out forever
Adam,
Ben Graham was a value investor. Buying good stocks at the bottom is what value investors do. This is probably a bottom.
Buying now is value investing if you go after the sectors beaten down past the point of common sense. This is exactly what I do. I’ll never buy into a rising market that just didn’t turn up from a bottom. And I won’t buy into anything that doesn’t look like it was just beaten senseless for no good reason.
An excerpt from my recent quarterly letter to clients FWIW:
“My favorite enigmatic question of the current environment remains: “If I told you on January 1, 2007 that during the coming year all of the following would happen: a) the dollar would trade at 2 to 1 to the British pound, 1.5 to 1 to the euro, and parity with the Canadian Loon; b) The stocks of Fannie Mae, Freddie Mac, Countrywide Financial, and all the bond insurers would plummet by at least 70% and have their stability in question; c) the heads of Citigroup, Merrill Lynch, and Bear Stearns would lose their jobs in the midst of huge losses; and d) Oil would trade at $100 per barrel, what would you guess the S&P 500 return would be?” Of course, any sane person would assume the market crashed and we were all selling pencils on street corners. But actually, all the indices had positive returns, though not spectacular. So you never know.
But so far, January 2008 has brought gleeful misery to the executive team here at ANGST. Although our large cash position has provided at least some buffer, our equity holdings have not been immune to the vicissitudes of the market. While periods of intense pessimism are historically the best buying opportunities, it is still early in the cycle of economic slowdown. There is simply no way the economy can grow that fast with the amount of capital lost by major financial institutions. If you drain 3 pints of blood from someone, that person won’t die. But you won’t ask them to go out and run a four-hundred yard dash either.
I have been absolutely mystified by the optimists who have said for over a year that the housing blowup would be contained. It seemed so obvious that the ripple effects would be deep and unpredictable, but the Wall Street shills and political shills just couldn’t or wouldn’t admit it. Finally, the picture is clearer, and you see reality sinking in this month–hence the losses so far.
This year will resemble 2002. Any portfolio that breaks even or better is likely to have done a good job. As always, I will do my best. One of the tough things in my business is that everything is cumulative. Tom Brady will always have his 50 touchdown passes from this year, even if next year he throws 50 interceptions. Investing doesn’t work that way. You can undo years of good investing decisions with one bad one.”
My big fear is that this year may resemble 1974, not 2002.
A big thanks to BR and this blog which has certainly been a big help to me in understanding the fallacies of bad data and worse analysis.
“What other economic statements, investing beliefs or market philosophies have been shown to be wildly false?”
1. By far the most important of all: That “financial innovation” has fostered safety and stability.
2. That foreign investment would support U.S. asset prices if the dollar declined and the economy tanked.
3. That we were in a new secular bull market (or alternatively, still in a secular bull market that began in ’82).
4. That the price of oil didn’t matter because oil is less important to our economy.
5. That the price of gold signifies nothing because gold is not used for anything other than jewelry, collectibles and speculating.
6. That cutting taxes on the rich improves economic growth and fosters prosperity for all.
7. That home ownership should be for everyone (or alternatively, that buying is better than renting).
8. That we can make historical comparisons while ignoring changes in the way government statistics are calculated.
9. That corporate and financial chiefs earn it.
10. That unregulated free markets work.
Here is how to send your comments to the Fed: http://www.federalreserve.gov/feedback.cfm
So what will 75-100 basis pt drop do? For openers it drives up the price of commodities, takes you down the path of reinflating the bubble, and does nothing for the 10 million homeowners that have or will have negative equity by the end of this year. We are between a rock and a hard place re any workable policy to mitigate the effects of popping the bubble. When significant numbers of investors realize this, the ingredients for the mother of all panics are present. Not syin’ we’ll have a panic, just sayin’.
A big proponent of the de-coupling theory is Peter D. Schiff (the author of Crash Proof: How to Profit from the coming Economic Collapse). He seems to appear, as of late, on TV shows juxtapose to an LA Realtor arguing that the US housing will continue to go down an unprecedented amount while the crazy looking Realtor argues this is a great time to buy. It’s a bit silly. Anyway, I’ve always thought that the de-coupling argument is a fantasy. In fact, it is so wrong that even at the very outset of trouble in U.S. consumerism the foreign-export driven markets are diving. At least the dot com and housing bubbles could actually defy gravity, at least for a while.
This baby boomer clicked the sell button on the 401k last fall and the return on the portfolio, now in cash, treasuries, foreign bonds, exceeds the indexes by 12 to 16% over the last 52 weeks. When to go long equities again? Not sure – but probably not at this open.
Posted by: RichardN | Jan 21, 2008 12:29:56 PM
BR provides thoughtful analysis of, and insight regarding, what can best be described as a squirming pile of lies and distortions (which he finds and posts for all to evaluate). He also provides a forum for those interested in examining said pile.
Nothing wrong with that.
Is he right? Sometimes. Is he wrong? Sometimes. Does he skew the info? No.
BTW: To set the record straight, I’m the one who first said, “I told you so.”
If the Fed cuts in the AM, Bernanke should be removed as Fed Chairman immediately.
The Fed exists to stablize the economy, not to bail out speculators. Let the market drop 6% at the open tomorrow. It wouldn’t be the first time, and it won’t be the last.
Your “what say ye?” is too easy to answer:
I’ll start at the top of my list and work down:
***1*** – Optimism existing purely as a form of w-i-l-l-f-u-l-n-e-s-s for its own sake. This is the great driving overlapping fault and it is a major component of all the other faults I’ll list. A lot of commentary has been offered, here and elsewhere, about the allocation of blame for what’s happening to the financial system. This item number 1 of mine IS the core blame. With the exception of outright criminal fraud (a largely inconsequential separate issue), it is omnipresent in every single venue of this fiasco.
Too, I’ll observe that many willful optimists express a lot of anger against, and attempt to mock, rational pessimists on the basis of their supposed lack of a philosophical ability to live an enjoyable life in the face of any threat. They tell us “don’t worry, be happy!” or, as we’ve seen lately in commentary on this blog, “if you don’t live a little, the world will just pass you by.”
What they express therefore is paternalism. Paternalism is its own form of willfulness for its own sake. Both optimism and pessimism are forms of functional blindness when fueled by willfulness for its own sake.
2 – Supply-side economic theory applied as policy … and I mean the philosophical concept of it, not just the application of tax policy. It owes to a blindly optimistic reliance on a build-out of capacity without regard for the rational DEMAND to support it, or a failure to recognize faulty demand for being what it was in the case of most of the subprime abuse, pseudo-rational demand. And, yes, this failure facilitated the ESSENCE of predatory lending (if you’re still here, Tyler Cowen).
3 – Next comes supply-side economic theory’s greatest facilitator – MONETARISM – and if you, my reader, can’t understand that or accept it, you’re blind to the entire macroeconomic developments of the last 10 years certainly, and probably longer.
4 – The greatest codified key that could have ever existed to unlock the phantom treasures of willful optimism – Hocus Pocus pro-forma EBITDA accountancy and the formal rules (FASB) that promulgated it, but only at the big league corporate level, not in commercial public accountancy which, as I’ve said, may have never been in better practice than now. It’s unfortunate that these qualities did not translate to the upper echelons, but I think it’s because of the:
5 – Widespread conflict of interest that was permitted by government to exist at the corporate level, even in the face of real, practical and easily defined observations of its abuse.
I suspect that it would be near impossible to identify any other failed investment policy, procedure, technique, rule, strategy or any other style of governance associated with economics that would not incorporate one or more of the above 5 listed elements.
I spare the reader a 6th item, the element of Public Ignorance, but only because it is too hard for me to quantify it as an element of blame.
“Buy for the long term”. This is a crazy idea promoted by mutual funds that allow you to ride a stock from $50 to $100 and then back to $50 again, negating all your gains. Instead, you need to monitor your positions and then know where to take profits.
If you’re an asset allocator, you need to review your allocations at least a few times per year, and adjust as necessary.
Bear markets do not resolve themselves in the space of a few weeks. There may be a rally or a wicked downturn Tuesday but either way we are still at the beginning. Bear market rallies tend to spike higher faster then Bull market rallies. You can try and trade the turns but it’s a lot tougher trading a Bear short or long then riding a Bull.
It may take a couple of months or maybe more then a year but a real bottom this soon is highly unlikely. Considering the amount of leverage in the system there may be a multitude of nasty surprises as the credit bubble unwinds. Be careful out there.
Emergency cut may not have a large lasting effect because the Fed is going to cut in 10 days anyway. If they cut tomorrow then again in 10 days, that’s a panic move that destroys the dollar. That’s why my money says they are boxed in.
Nas futures down 76 BTW…what is lock limit down number for Nas futures? Anybody know?
via dictionary.com:
Word of the Day for Monday, January 21, 2008
callow KAL-oh, adjective:
Immature; lacking adult perception, experience, or judgment.
Those who in later years did me harm I describe as I knew them then, and I beg any reader to remember that, although I was hardly callow, I was not yet wise in the ways of the world.
— Iain Pears, An Instance of the Fingerpost
Callow is from Old English calu, “featherless, bald.”
The biggest lie: you can borrow your way to proserity.
ditto that Byno. and the same to politicians who responds with vote buying red envelopes.
Cinefoz,
I think it is extremely dangerous to call this a bottom. There is absolutely no sign of a bottom at all right now. Knife-selloffs do not resemble a bottom; in fact, there are few easier ways to lose your money than to try and buy into this.
When we get big selloffs, so many people are trying to jump in and call bottoms. Is that because they believe it really is a bottom, because they want to believe it is a bottom in order to justify their own opinions or because they don’t know any better? I’m not trying to insinuate that you, Cinefoz, are any of those people; I’m only trying to point out the fallacy of much of the herd.
From a technical standpoint, the charts will show some consolidation patterns before ANY lasting bottom will form. Don’t mistake the V-shaped recoveries of March 2007 and August 16 as bottoms. The August 16th V-bounce was simply part of a longer-forming top. While we will get a bounce here at some point – and it may very well be sharp – don’t mistake it for a bottom. Bear market rallies are often very sharp (the 3 biggest Nasdaq rallies in history occurred during the bear market at the beginning of this decade).
My feeling is that this is a potentially very, very bearish setup. Only now, after so much water under the bridge, are we, in my opinion, really beginning to see some panicked selling. This tells me that perhaps some real fear is beginning to set in and that the bear is going to be here for a while.
Who’s that idiot who keeps on talking about Repos and the PPT every day ?!?!?!?!?!?
Again eclectic gets the hat tip.
IF this is a rerun of 1974, we may see an 8 handle on the Dow. There are many rest stops along the way.
“when they raid the whorehouse, they even take the piano player.” IE: no place is safe.
We may well be in the process of a crash.
If the Fed cuts too much they will show how panicked they are. Cuts will/would only be a temporary band-aid anyway.
It’s beautiful how many people were not prepared for a crash. This is how big money and reputations are made. I love it that on this blog, where many are well informed, there are still bullish people. When the bounce does appear, they will go long and likely get crushed.
just hilarious
From “Project Wing Northern Rock Executive Summary”
“… most cost efficient bank in the UK … highly diversified … ”
More http://wikileaks.org/wiki/Image:Project_Wing.jpg
fixed link…..
I think you’re all forgetting the greatest bamboozle of them all over the last ten years:
“People need to go out and shop and consume.” President Bush
Explain to me how this will create a thriving PRODUCING economy, when 70% of it is geared towards consumption?
RichardN, I value what BR does. My concern is that I see a nation of 300 million people being mismanaged and thus I feel relief when the “pain” of financial rebalancing might actually lead to a rectification of the problem before it gets even worse.
“I told you so” can be therapeutic for everyone involved.
Cinefoz:
It seems the posters here agree with your general approach: buy (very) low, sell high. But you are accused of calling a bottom prematurely. I believe you also called last Monday a bottom and said you went long with 50% of your cash then. Are you really going to buy in with (some or all of) the remainder tomorrow?
I would propose that the “mother of all fallacies”, the one to which most others can be traced, is the basic global economic model that has been allowed to develop over the last 30 years or so: sell as much shit as possible to Americans while, at the same time, taking as many of their jobs as possible and crushing the real wages of most that remain.
To me, that always seemed a bit like starting a chicken ranch to go into the egg business, then eating the chickens faster than they can reproduce. Can’t last forever.
But I’m not an economist so what do I know.
Hi Five for taking out 401K money from the stock market in Aug. I did Dec 4 and I’m also up pretty good from the bonds that everyone wants now.
I posted this last spring but seems appropriate now also.
Laughter can add 8 years to your life…
In early 2005, Bennie and June wanted to marry and set up housekeeping. Bennie rented a small studio and June was still living with her sister. They went looking for a two bedroom apartment and found one for $1250 a month. They were told they needed to pay first and last months rent plus a $750 deposit. They did not have $3250 in cash. June was a secretary and earned about $28,000 a year pretax. Bennie was a salesman for a tote the note used car dealer and averaged close to $38,000. They were bright young kids and knew from their parents to keep their housing expense to about a quarter of their after tax income.
Bennie’s Uncle Vinny had a solution for their dilemma. He knew of this house that had just gone on the market,, by owner in a very nice neighborhood in Phoenix. It was priced at $600,000 and was just two years old. Uncle Vinny told Bennie to go to the owner and offer him $625,000 on the condition that the house would be financed for $700,000 and that the day after closing the seller would kickback $75,000 to Bennie and June. Bennie would have to pay cousin Lennie, a certified appraiser, $15,000 which would leave Bennie and June about $60,000 to set up housekeeping. Their loan would be No doc no closing cost 100% with a two year teaser rate of 3.75%. It would reset in January 07 at 4.5% above Libor.
Uncle Vinny recommended that Bennie save the amount they would have paid for an apartment to pay taxes and insurance on their new home and use the $60,000 to help pay the monthly mortgage. It was a done deal.
Every January for the past two years, Bennie and June’s insurance company raised their coverage on the house by $100,000 assuming like all insurance companies that homes only appreciate in value. Besides structural damage now at $900,000, the contents package was equal to 40% of the house value or $560,000.
Bennie and June were happy. Their house payment of $2187 a month was $937 more than rent but that money came from the $60,000 they banked at closing with about $7500 left over after two years which they spent for furniture and patio furniture by the pool. Then came the shocker. Their mortgage holder informed them that their loan had re set to 9.8% which increased their monthly to $5,716 a month.
Bennie went to Uncle Vinny for advice. Uncle Vinny told them to refi but the market had collapsed and Bennie and Junes house was only worth $600,000. Uncle Vinny then recommended a visit to his second cousin Denny who was the son of great Aunt Winnie. Denny specialized in mortgage equity extractions.
Denny told Bennie and June to plan a vacation, purchase two potted palm trees and a space heater to keep them alive in their garage while they were away. Curiously Denny told them to make sure the car they left in the garage had a full tank of gas……..
Upon arriving home from vacation, Bennie and June were aghast to find their beautiful four bedroom three and a half bath home utterly destroyed by fire! Poor heartbroken Bennie and June collected $1,360,000 from insurance and paid off their $700,000 mortgage. A small gift of $50,000 to Uncle Vinny and Denny for consulting on this matter still left them with $510,000, enough to completely rebuild their home on their own lot and foundation which did not burn. Fire equity extraction. FEW coming to a neighborhood near YOU ?…………….
I have a hard time believing a selloff will not rebound tomorrow.
With a nearly 5% drop tomorrow predicted by most…that would leave all major indexes in the US down 14-16% THIS MONTH!
Eh?
When has that happened in one month?
Peter Davis,
You, my friend, appear to be following the crowd, as part of the huddled masses.
Think of money as water. The world is awash in money. Like water, it need some place to go. Unlike water, the quantity of money increases over time. This is one of it’s basic properties.
While money has the capacity to quickly drain into protected pools, it’s nature is to flow when the currents and waves are not exceptionally disruptive. Another property of money is that it easily heats up and expands in volume when the environment is stable for long periods. Secondary sources can create lots of money when things heat up, not just Reserve banks.
Offsetting the properties of expanding money, it only has a rather fixed number of places to go.
Thus you have the pressure of an expanding money supply against a fixed number of places for it to travel. Expansion is based on explicit creation and secondary sources such as credit and derivitives.
Secondary source money can disappear rather quickly, creating credit panics.
The market will ALWAYS eventually recover. All drops are temporary as long as the deflationary properties do not take over. Stability will always flush money from protected pools. Then the creation and expansion process begins anew.
We are getting a “Stimulus Package”.
What we are getting is a loan. Thats right… because we have maxed-out our credit cards, the gov’t is raising our credit limit by $1,600/family.
“The market will ALWAYS eventually recover. All drops are temporary as long as the deflationary properties do not take over. Stability will always flush money from protected pools. Then the creation and expansion process begins anew.”
Tell that to Japanese people who’ve invested.
“You can’t win with Eli Manning!”
“You can’t win with Eli Manning!”
It is quite possible that whatever the Fed does tomorrow may not save the markets/economy. That doesn’t mean the Fed should stop trying. They have to try, even if they believe it may not work. However, history has shown that it worked eventually.
This Bear has been remarkably friendly to short sellers so far. Bear markets are usually rough on both the Bears and Bulls…
John Borchers
The Japanese are a perfect example of what happens when asset inflation based on credit gets way way way out of hand and deflation is allowed to take it’s place.
I have a question.
I own the Profunds Ultrashort Financial ETF. What would happen to that fund if shares of one or more of the index components could no longer be borrowed?
Cinefoz,
I’m not saying that markets don’t always recover. Of course they do. But they don’t always recover tomorrow.
And just because money is there, that doesn’t mean it’s going to flow anywhere. It’s not like water at all. Water obeys the laws of physics. Money flow obeys the laws of human psychology. It will flow based on how positive or negative people feel. If this wasn’t the case, how could possibly explain booms and busts? These events are manifestations of the extremes of human psychology and it is these emotions that move markets.
Too many people assume markets are rational. They’re not, because they’re moved by people and people are inherently irrational. We all make choices based on our emotions, and this is something that has never changed and never will.
I don’t believe that I am following the crowd at all. I’m not of the opinion that the markets are going straight down; they never do. But I’ve heard the global liquidity argument for a while now, and that certainly hasn’t stemmed the tide this month. If global investors do not feel they are going to get a positive return on their investment, they’re not going to invest. Some may think now is a good time to get in, some may not. But it is the historical pattern of bear markets that extreme selling periods do take place and to think that the idea of global liquidity will somehow render this moot is foolish and yet another example of the “it’s different this time” argument.
Dirty Mac,
Aren’t they based on future contracts?
I have EEV and that’s based on futures for EEM (double inverse). I would think it’s similar.
Also don’t be surprised to see your short fund lag. Friday my short fund was laggin because everything was apparently getting sold!
Peter Davis,
YES! It’s all about the money supply, psychology, and greed. Right now, the herd is in stampede. That level of energy can not be maintained. More adventurous souls will jump back in. They will be followed if everything look safe.
Look at nature. Animals still cross rivers even if their friends and family are occasionally eaten by alligators. People are no different. Eventually, the lizard brain reverses and looks for greener pastures. The herd follows.
THe information age and the internet has changed the world by creating a much faster business cycle. This brings people out faster and in faster. What you know is still valid, only your time reference is much too slow now.
1. “Invest for the long-term” is not sophistry.
2. Things that have a low probability of happening, won’t happen.
Next up:
3. Index investing is a “safe” investment vehicle for your retirement.
4. Emerging markets must become mature markets. (That’s why they are called emerging, right?)
5. China is different this time.
Many don’t know that China has already had market collapses many times.
does anyone knows the answer to where the money in the markets come from?
i thought retail investors make less than 20%.
rest is being managed by fund managers. but why are people not taking their money out of funds?? are they locked in for certain period?
i took my 401k out of fund three months back, why has everyone else not done that? are they not aware of market going down?
@Dirty Mac: as John Borchers pointed out, the short ETFs don’t really hold the shares short; they’re apparently based on futures and swaps.
Short ETFs
BTW, I would have loved to see the Chargers clobber Eli Manning in the Superbowl (only because he pulled a LeBron James and said he’d rather sit out his rookie season than play if the Chargers drafted him). oh well, ’twas not to be.
One thing that I keep hearing is that China will never trade significantly lower before the olympics, oops. The decoupling has been rubbish from the start, the American markets will always have a great effect on the world markets.
zero…
if that’s true why did I have dividend proceeds reinvested while holding SDS?
cinefoz…
i agree that money will flow into the stocks again, but i disagree with the timing of it.
what if we continue selling for next 4-5 months, then keep going sideways for year and then maybe another bull market may start.
why buy now? is it with the belief that if you are right, you make a lot more than others? what if you buy now, but we get another 20% sell off in next 3-4 months??
why not wait for some good news? for a base to form?
all that said, even i will be speculating for a big bounce, but with a hedge (three puts for every five calls, or maybe just plain strangle)
At first I thought Cinefoz was a troll. Now I just think Cinefoz is a fool. You really think the Fed “not pissing in dribbles like an old man” is our way out? You really think “ignore Japan because it is a permanent outlier” is not the same as “ignore datapoints that don’t agree with what I want to believe”? You really think that this insanely wound up and complicated mess can be unwound and re-discounted and found to be worth more than expected all within the space of 6 months? Is there a way to short Cinefoz?
Screwed saver. I got a dividend in EEV too in Decemeber. At first when I looked at my account I thought it was the fees for the fund management. But then when I looked again I realized it was a payment not a withdrawal. I don’t know how you explain that at all? I got around $33 for each lot of EEV I held.
John B.–same boat. I was going to look into it more, but I thought if they want to give me free shares fine :)
I was under the impression zero gave that it was all done with derivs and they didn’t hold real stocks…maybe this was some kind of special tax thing they were doing. I guess I should still look into it.
John Borchers is the new and improved Michael Schumacher
I just checked it under scottrade it’s a lot more clear. EEV has a 1.6% divendend which is paid quarterly. How sweet is that, short that pays twice, LOL. Anyway I guess they take the 1% fee from the divendend meaning the div is really 2.6% because I have never been charged the 1% for holding EEV (at least so far). EEV is based on leverages which could be options, futures etc. I guess that’s where they make the divended money since everyone is playing high fee options now with the market so volatile.
Myth:
“There’s a Bernanke put”.
(Actually stocks may have had one once, but it was borrowed or stolen by the mortgage market)
Bottom tomorrow (short term). No way Bernanke and his gang are letting the Dow touch 11,000 this week, no way. Think for a secon, at this rate, the Dow will be at 10,000 by early next week, how realistic is that? Comments.
Hey, the Fed can’t do squat. The emperor has no clothes. The house of cards is about to tumble. Lies, lies, lies, then boom… reality!
techy2468,
I’m not expecting a big bounce initially, at least I hope not. There might be a couple percent to offset the past week, but the rest will be a slow climb. I’m going for more Europe and entry into Emerging Markets once they look stable.
The animals will start crossing the river in groups once the second or third monkey makes it without being eaten by an alligator. A lot can be learned by watching the animals.
John – yea I have EEV too. Except I sold my SKF at 115 hoping to buy it back cheaper. Now EEV is my only short exposure to emerging markets.
Hopefully it opens up 7-10% tomorrow to cancel out some other losses..
YAY AMERICA!! We are the best!
Monkeys cross the rivers in trees where they are safe. If you look for monkeys overhead and assume because some made it across the river in trees but then you cross the river by foot you’re probably in for a surprise.
philip asked:
You really think that this insanely wound up and complicated mess can be unwound and re-discounted and found to be worth more than expected all within the space of 6 months?
reply: In 6 months it will be dipping again for some brand new reason tangential to this reason. Between now and then I expect to make money going long.
The stock market will always be an unsettled place and people are impatient. It will go up as quickly as the sellers are outnumbered by buyers. 51/ 49 in favor of buyers will get it rolling. Only one more monkey safely crossing the river will do it.
Thanks for reading my stuff.
What investing beliefs are now revealed as horrifically and expensively wrong?
The apparent reigning philosophy in the financial community: “Let’s give the scorpion a ride to the other side of the river. He promised not to sting us.”
bold’un,
Quoting you (regarding a Bernanke Put):
“Actually stocks may have had one once, but it was borrowed or stolen by the mortgage market.” end quote.
—
Your comment was the most sublime comment made on this blog in months. Barringo should memorialize it as a topic heading comment.
One word: Goldilocks.
“Speak sense to a fool and he calls you foolish” – Euripedes
beautiful!
Slightly off-topic, but from the same “head in the sand” school of thinking:
What should the public know right now about what a war with Iraq would look like and what the costs would be?
Rumsfeld: Cost in dollars or cost in lives?
Stephanopoulos: Dollars and human costs.
Rumsfeld: Well, the lesser important is the cost in dollars. Human life is a treasure. The Office of Management and Budget estimated it would be something under 50 billion dollars.
Stephanopoulos: Outside estimates say up to 300 billion.
Rumsfeld: Baloney. How much of that would be paid by the United States, how much by other countries is an open question.
http://www.defenselink.mil/transcripts/transcript.aspx?transcriptid=1308
_______________________________
In the days before the war almost five years ago, the Pentagon estimated that it would cost about $50 billion. Democratic staff members in Congress largely agreed. Lawrence Lindsey, a White House economic adviser, was a bit more realistic, predicting that the cost could go as high as $200 billion, but President Bush fired him in part for saying so.
These estimates probably would have turned out to be too optimistic even if the war had gone well. Throughout history, people have typically underestimated the cost of war, as William Nordhaus, a Yale economist, has pointed out.
But the deteriorating situation in Iraq has caused the initial predictions to be off the mark by a scale that is difficult to fathom. The operation itself — the helicopters, the tanks, the fuel needed to run them, the combat pay for enlisted troops, the salaries of reservists and contractors, the rebuilding of Iraq — is costing more than $300 million a day, estimates Scott Wallsten, an economist in Washington.
That translates into a couple of billion dollars a week and, over the full course of the war, an eventual total of $700 billion in direct spending.
http://www.nytimes.com/2007/01/17/business/17leonhardt.html
Re: dividends in short ETFs, here’s what the blurb that I linked to says:
“[ETFs] don’t short the “basket” of all the component stocks in the index. Rather, they use derivatives that don’t have the trading costs associated with shorting.
These derivatives include index futures contracts and swap agreements. . . . One interesting aspect of this is that the short side of the swap always receives an interest payment for allowing the long side to get the fund’s potential upside. However, if the fund falls in price, the short receives both the downside returns as well as the interest.”
So maybe the interest is the source of the dividends?
Another rate cut? Aye! We are staring hyperinflation full in the face and some of you are calling for a massive rate cut!
I call Occam’s Razor on all of you.
There will be no rate cut tomorrow. Bernanke will wait until the regularly scheduled meeting and then cut .75. Markets will bounce (short-term) and then resume their downward slide to 10,600 on the Dow before a bottom begins to form. We’re unwinding a credit bubble; it won’t be pretty but it’s necessary. Keep your powder dry.
500 point drop is guarenteed tomorrow, 1000 points is possible.
What was the trigger? Hard to say. Jumbo Mortgage loan market is locked up, Cramer blames the insurance companies and Bush did just complete a round the world trip. j/k
md
*The sub-prime mortgage sector is so small a portion of the overall mortgage market it will have no effect on the financial industry.
* Not only does inflation not exist, it is a non-factor in gauging economic health.
* Robust, ever-increasing corporate profits are here to stay.
* Whatever perceived domestic slowdown occurs, and it won’t, the unrelenting growth of international markets will keep us strong.
* Any U.S. slowdown would not have any effect on global economics.
* The “you’re absolutely right Larry” crowd is absolutely wrong.
O’Kane says, being a shill for the Goldilocks fetish is not a good investment of time or reputation.
“Bottom tomorrow (short term). No way Bernanke and his gang are letting the Dow touch 11,000 this week, no way. Think for a secon, at this rate, the Dow will be at 10,000 by early next week, how realistic is that? Comments.”
If there’s no announcement tomorrow morning, Dow down 700 pts easy….
Barry Ritholtz,
I’m curious. After this dip eventually passes, will this be a place that perpetually forecasts the coming next crash? Is this the anti-Kudlow site? Perpetual Goldilocks is a little tiresome, but the sky is always going to fall is just as bad. Both views are broken clock forecasting, although markets spend more time going up than down.
Some of these posters seem a little disassociated with the real world, and use slogans for an intellectual substitute. There is room for a diversity of opinion since none of us are psychic and the next random event could create all sorts of variation.
Granted, there are a lot of idiots who rationalize in creative ways to justify markets that go up. This has always been true and it will always be true.
So, assume a turnaround. What might be the topic of the day?
Economic growth is the cause of inflation.
cinefoz..
so far i dont think barry has gone too much to the bear side.
but since now he is vindicated and we are all educated about the ills that the bulls refused to even debate two months back, i expect him to now spend time to guide us through this rough market….so that we dont get killed catching a falling knife…
which means…he will have to be bearish a little longer…..and then when the whole world thinks that stocks market is the best place to lose money….then i expect him to start writing the good things we still have left…and why it will not be the end of world.
BTW how about some bullish sentiments:
I am thinking what if quality stocks like MSFT, INTC, WMT etc.. go down by more than 10%, they are good buys right?
what if agri sector gets sold by 30%, its not like people are going to stop eating?
comments??
Won’t the “circuit breakers” make a 1,000 point face plant impossible?
larger rules and strategies that are now being revealed as utterly incorrect
How about the housing component of inflation being tied to RENT?
New Yorker,
IIRC, circuit breakers kick in at around -1300 (10% of dow when the level was set for the quarter). Assuming it happens early in the day, trading gets halted for a hour.
I believe the trading curbs (2% of NYA – restricting program trades not adding liquidity) have been eliminated.
you just received 175+ pretty negative posts and counting. If this isn’t a sign that a substantial bounce is coming, then all the market psychology books in the world mean “squat” including everything i’ve learned from reading this blog over the past couple years…
By the way, is this a record posting for this blog?, if so congrats!!!
Barry,
But it is “different” this time.
Its far far worse than anyone could imagine and here are my TOP 10 reasons why…
PS, we could be 20% down from peak after tomorrows tidal wave slams the markets.
http://naybob.blogspot.com/2008/01/top-10-reasons-why-it-is-different-this.html
Permanent Republican Majority.
Probably less than 25 unique posters made those comments – not sure how much sway those 25 hold in the market.
“the easy money has already been made”
anybody that has made the so called easy money knows it didn’t feel easy.
“uncorrelated assets”
“the (fill in the blank) bubble”
“booyah!”
“best in breed”
“the perfect storm”
“it’s got a great looking chart”
“buy real estate…don’t ya know they aint making any more of it”
“you never lose money in real estate”
I agree with the decoupling article by Barry. That being said, I am betting that the international markets are much more at risk than the US. The accounting standards are horrible, and the risks in owning foreign stocks and have been totally ignored. The modern day rust-belt manufacturing economies that are the emerging markets are at a huge risk when the demand for their factory goods slow, along with the demand for their natural resources.
Good luck to everybody tomorrow, as it appears from the futures that there should be enough merchandised priced right for the bulls & bears alike.
Too mush debt doesn’t matter and remember the clowns who said the unprecedented rise in margin debt on the NYSE doesn’t matter?
Totally f**king clueless.
Bernanke – “The economy appears likely to expand at a moderate pace over the second half of the year”
– – – – –
We are barely into the first half of the year and yet it’s quite obvious this statement makes no sense.
An opening plunge-intraday bounce is certainly possible tomorrow though I wouldn’t be trading on that thesis alone. For those of you with shorter memories of corrective markets, take a look back at the intraday charts for April 2000 on the Naz. After a long weekend, the index fell 8% on the Monday and it wasn’t until the next day after a further 14% decline that the market bounced and even then resumed the freefall a week later. Certainly lots of profit potential for aggressive traders but I prefer to buy and hold my FXP’s and QID’s. Uncle Ben is irrelevant whether he cuts 50bps or 150bps; market is finally getting the message that changes to the short rate isn’t going to get people into shopping malls and new hummers at a quick enough rate to offset the contraction already in place.
Outside Observer I follow your concern
lucky for the system we have the military industrial complex and diaster capitalism to hold the game together
but wee little me gets the bill while I wait for the trickle down percentage – maybe Canada is a positive move – thats a major step require’g permission from 2 governments
We will know if we have had a panic if we get into a bid wanted situation with many otherwise liquid stocks. That is when your screen quotes $52.98 for a stock but you place a $52.00 limit order and you get hit immediately.
jwk: The 25 posters you counted is accurate but to assume that they are 25 individuals as opposed to a representative sample of the larger small trader/investor is a mistake. I have talked to a few friends the last couple of days and they are truly scared of mounting losses in the real estate market as well as in the stock market. I haven’t seen that kind of fear before.
What does that fear mean for the markets tomorrow? Don’t know, but we will find out in a day won’t we?
I have been sampling sentiment for the last 10+ years and I can tell you that we have now reached a critical mass in public’s thinking. Real estate crash, subprime mess, recession are fairly widely acknowledged. And as I mentioned in a msg above, the Counter Party Risk theme has made a quick leap from the niche corner to the main pages.
IMHO, a problem acknowledged is a problem partially solved. We haven’t had acknowledgement of many of these problems for a long time despite much evidence, but the worm has turned.
Reading the various posts on this site and at a few other blogs, I can assert that there are no illusions anymore about the nature and depth of the problems.
Short man – “Uncle Ben is irrelevant ”
IMHO, that may be the next piece of bogosity to be foisted on us. We’re in the “they’re behind the curve” phase now. After that, we’ll get the “pushing on a string” arguments.
techy2468,
I only buy what I understand and I don’t understand individual stocks. They are too erratic. Sectors make sense to me because they, as a group, are much easier to guess about. History can also provide an indication of how well or poorly they are doing and if they are too high or too low relative to the rest of the market.
Anything down below historical averages is a possible gift. Is the sector or group likely to go up to base levels and continue normally after that? Will people stop using trucks or ships? Are the brokerages going to close? Is Hong Kong going out of business? If it isn’t well below trend after all this, I would probably avoid it for now. Lots of sectors and groups are freaking cheap.
I think Emerging Markets is almost ripe. Buying the dips there is a license to print money. I will avoid Japan because it does not follow any consistent rules. However, if they dip to 11000 or there abouts, I will reconsider … and probably hate myself in the morning.
… The market has always behaved nebulous to me, and I always prep for being wrong, because I frequently am.
Back to matters at hand.
… The best thing for the United States is, that the dollar is now stronger, Europe will weaken, ECB will cut and it allows a more lenient Fed.
this Loosens up the Ties that have bound our fed.
The Decoupling Theory has been around as long as there have been stock markets.. it’s an even older story than “P/Es are Low”
There is a much better argument that we are all much more interconnected than ever. The last time there was “decoupling”, Mankind Carried Clubs and Flint.
“Ain’t a fit night out for man nor beast! ”
“Greed is good”….
bt: I was just pointing out that this blog in isolation might not mean too much in terms of overall sentiment. If you take samples from a wider audience, then that changes things. My take is mixed based on looking around. People that are intimate with the market have a level of fear, but others who don’t follow day to day seem to just be waking up and looking around. I don’t know what will happen tomorrow either, but it will be interesting!
Well I think whether or not Bernanke and Company ride to the rescue sometime tomorrow (whether it be with ‘Jaw-Boning’ about rate cuts or with an Industrial Strength inter-meeting cut) we stand a good chance of beginning to put in a Short Term bottom into the Stock Markets as they reach longer term (Horizontal) support levels. Barring no rate cuts (and no dramatic change in the futures) the CBOE Total Put/Call volume, $VIX and $VXN indices should all spike to levels that give us our “Capitulation” or “Blood in the Streets” feel many have been calling for. Once the Margin Calls are (Temporarily) out of the way (no doubt many are by now anyway), I think the Shorts and some Hedge Funds cover and/or Buy Programs kick in the event of a FreeFall. Either way it’s very likely a safe bet to be looking to go long the Markets sometime this week.
All IMHO of course…
Tomorrow?
Why wait, watch Europe and Asia tonight. Europe and asia dropping was not so surprising but the amount that the ‘DAX’ got pummeled! -523 points for a 7000-8000 market, and it had been wtihstanding our down draft fairly well… That caught me offguard.
Cinefoz, to me, it seems like the emerging market investor is very green and unrealistic. Asset flows to those markets have been huge, and recent, with most of it the johnny come lately, theoretically non correlated types piling in en masse. On a fundamental basis, the emerging markets are cracking. They are a big risk big reward proposition, and unfortunately, many investors forget the big risk part of the proposition. When the mo-mos start puking up their emerging ETFs, and funds, look out below, as the mo-mo cuts both ways. In fact, emerging market investors at this time remind me of the Janus/Firsthand types of the late 1990’s, which was 40% per year is my birthright, and “this time it’s different”.
If it wouldn’t be for the TV fools who taught everyone to look for capitulation or the Vix would they ever get in the way?
This point I think is ridiculous. There is an assumption being made that the Vix will go as high as it did last time and the sell off will be over. That’s probably a completely moronic statement.
The future is always what guides the market. When it looks grim or more uncertain then normal prices get marked down. When the opposite occurs and things look great things get marked up.
If you look at the Vix in 2000-2002 you would have rode the crash all the way down because there was no spike.
I believe this time the market continues to sell over time although that depends totally on how many people are actually on borrowed money for equities.
Anyone buying on Tuesday? Maybe SPY or UltraLong SPY?
Ay! European and Asian futures are down quite a bit now (-3% to -7% per market except Japan with -1% approx) according to bloomberg.com. No futures up at all.
Sydney futures are indicating another 2.8% down. Of course now they are showing our US futures to Austrailia and they don’t like that, LOL. TV is too funny.
“Well I think whether or not Bernanke and Company ride to the rescue sometime tomorrow (whether it be with ‘Jaw-Boning’ about rate cuts or with an Industrial Strength inter-meeting cut)….” – John
The unfortunate thing is, Bungling Ben Bernanke has jaw boned repeatedly and blown it on the follow through. At this point, everyone can see it’s the “jaw bone of an ass”, ha, ha.
Looking for capitulation, here it is. Even if the Dow is heading to 10,000, it’s not happening in January. Ben will come up with something tomorrow, at this point it won’t take much for a rally, AAPL reports tomorrow, a strong outlook afterhours may do the trick. I just can’t see the market going any lower after the open tomorrow. On top of that, Bernanke may cute rates tomorrow by 100bps. Comments?
US Futures turned green as they opened at 6:00PM. Anyone know anything?
Careful about the futures, they trade funny.
all indicators whatever they are not necessary show (and mean) long-term decline in stock market prices and recession. One needs more time to really say “recession” and sometime mistakenly. Remember 2001. NBER redefined recession in order to avoid great shame.
“Foreign investors taking advantage of the weak dollar will add support to the market”.
The Japanese snatching up real estate in the 1980’s was a market top. Huge foreign interest in major US investment banks will likely be the high water mark for this latest financial bubble.
Those Doom and Gloom books are ridiculous,
U.S. Futs are still red John.
ES -60.25 @ 1265.00
YM -613 @ 11603
NQ -76.50 @ 1773.00
as of 7:33 pm EST.
those include last nights drop…
Cinefoz
You obviously know much more about the market than I do. I know two things though;
“eventually” could be as long as 25 years, ala 1929-1954 and, it took us a long time to get in the position we’re in now, to think it will rectify in a short time is verrry optimistic.
All of your suppositions and inferences are trumped by the simple and glaring fact that the macroeconomic picture in this country is not good.
…according to the VaR risk model, the likelihood of this happening is…(insert #) standard deviations, therefore statistically almost impossible.
The tide is going out tomorrow. And, at the moment, I’m swimming half-naked. (Some shorts but net long.)
As they say in Avenue Q: “it sucks to be me~e~e~e~”. ;-)
Heh heh heh..I’ll live.
Hey, let’s all be nice to Cinefoz. (Nobody’s been outta line, really…let’s keep it that way.) For two reasons: (a) cuz we gotta respect minority opinions (otherwise, we’ll drive them away) and (b) if he’s right, he can afford to buy us a round of drinks at year-end. ;-)
Barry,
Most of the sell-off, particularly in Emerging Markets and Commodities related stocks can be attributed to the unwinding of the Yen carry trade as the Yen continues to test record levels. This explains the recent indsicriminate sell-off.
The decoupling thesis is still in tact and I would suggest that once the yen/dollar positions that are still o/s are unwound, then those same parties responsible will cover their short positions. These players are not motivated by fundamentals. They are motivated by cheap Japanese money and how they may make the best use of it.
Once the big unwinding is done, they will cover their short positions and these markets and the carry trading will continue on cheaper Japanese credit.
Here comes the re-decoupling. Its going to take investors by surprise. Put your money in emerging markets, commodities, and gold.
PD
I want to go Long tomorrow at the open BUT the more blogs I visit, the more I see folks calling for a bottom/capitulation tomorrow. I’m beginning to have doubts about going long at the open tomorrow. Believe or not, I see more bullish posts rather than bearish posts on several blogs I’ve visited this afternoon. Seems as if everyone expects the market to open low and close in the green or black tomorrow, so where is the fear? Wouldn’t capitulation take place when no one expects it?
I can give you one that holds: Financial markets are cyclical; Some cycles are too long for those alive to have lived through one, e.g., THE KONDRATIEFF WAVE, and others.
Never can remember this Russian economist’s name, but the theory–I learned it in one of my finance courses–remains indelible in my head. Its logic is so simple and irreproachable.
Take a look at this link: http://www.finanadviz.org/masterofcyclestime.htm
from Schildgen’s Intelligence Review.
The Depression babies are gone. Instead we have the Baby Boomers who are clueless as they repeat the mistakes of the Gilded Agers. Pick up any text on the history of the American economy. Read the chapter on the 1920’s. Then knock down a double and read the next chapter. You’ll find out you don’t know what you think you know.
Barry, I watched you talk about the stages of loss–the denial stage is costly; it multiplies the damage. By the way Roubini doesn’t foresee stagflation. Says the global conditions for inflation won’t arise. I say, “Fasten your seat belts. And wait awhile.”
What investing beliefs are now revealed as horrifically and expensively wrong?
Bankers are conservative.
Bankers are in an exalted class far above lyin’ cheatin’
used car salesmen, three-card monte street corner hustlers, and bank robbers.
Banks are a safe place to put your money.
Wall Street brokers are just like their TV ads and have the best interest of their customers at heart.
Wall Street brokers are in a respected class far above pickpockets, pyramid letter writers, Ponzi schemers, and pimps.
“you haven’t lost a penny in stocks if you don’t sell”….reiterated most recently by Mr. Zero Credibility himself, Dennis Kneale….
”the United States is the greatest country in the world”…if Osama bin Laden had written a playbook to destroy the US economy, it’s being followed to a ”T”. We will be spending trillions on a useless, unnecessary war while our public education system becomes appalling, college education becomes out of reach for most, and public infrastructure is completely neglected. We borrow ourselves into oblivion, leaving ourselves few options how to dig ourselves out of the hole we find ourselves in. We elect a complete moron as President, and then re-elect the idiot who would make a lousy town dog-catcher. We have a currency that declines precipitiously in 5 years, yet we have Bush cheerleaders like Kudlow and IBD telling us ”it hasn’t really fallen that much.” We have a broken political system where the radical right and the radical left battle for the agenda, lobbyists and corporations have outrageous influence and sound centrist policies aren’t even presented. Just where is the evidence that the US is still the greatest country in the world? Winning the cold war put this country into a permanent state of self-delusion since then.
“Is there a way to short Cinefoz?” Philip, that is priceless. LOL.
Todd, I agree with most of what you say, except for the “radical left” bit.
The right has captured the agenda for years, as evidenced by our willingness to re-elect said moron and the overwhelming corporate/lobbyist influence.
The radical left is nowhere to be seen these days. Heck, if Nixon was a politician today, he’d be left of Hillary……
Whammer, you’re right that the radical left has controlled absolutely nothing the last few years. What I’m referring to is that the primary process in both parties essentially brings to the fore only people on the very liberal side of the Democratic Party and the loony wingnut side of the GOP. I think both have loser philosophies (liberals=too much tax and spend, conservatives=outrageous borrow and and spend + massive corruption). A centrist approach is needed but there is no centrist on the horizon in either party.
As far as Hillary is concerned, I don’t see her proposing spending cuts as well as keeping taxes as they are. I wish she would do that.
Both parties are culpable but the GOP is massively to blame. They have orchestrated the destruction of the solid foundation of this country. A Mussolini-like end would be fitting for George Bush, Dick Cheney and company as well as all their mealy-mouthed GOP colleagues in Congress.
my blinders came off
I realize how much of a tool I am (my generations) ie break the sodd of this new world and turn it over
hey I’ve been having fun
from Wikipedia – THE KONDRATIEFF WAVE
The Industrial Revolution–1771
The Age of Steam and Railways–1829
The Age of Steel, Electricity and Heavy Engineering–1875
The Age of Oil, the Automobile and Mass Production–1908
The Age of Information and Telecommunications–1971
next age
The Age of Positive Connected Temperance Equality
last hours on the main page – this thread got me researching as well as Naomi Kleins book Shock Doctrine checked out of the library – sorry Naomi
http://www.rightwingnews.com/interviews/friedman.php
Friedman: “the progress that the US has made over the last couple of centuries has come from unemployment. It has come from figuring out how to produce more goods with fewer workers, thereby releasing labor to be more productive in other areas. It has never come about through permanent unemployment, but temporary unemployment, in the process of shifting people from one area to another”
Greg0658 agrees – except we aren’t hoe’g fields anymore – now we need brains over brawn
_____
John Hawkins: “The economy certainly did well in the Clinton years except for the recession that started right at the end of his term. Was that because of Bill Clinton’s policies, a continuation of the success of Ronald Reagan’s policies, or something else?
Milton Friedman: “I think it was #1 a continuation of the Reagan policies and #2 an indication of the virtues of a President of one party and a House and Senate of the other. That’s the best combination for economic growth…”
Greg0658 – WRONG, it was the selling of the factory base to cheaper labor foreign lands
Greg0658 – NOW WHAT